Toby Nangle’s the brightest voice in pension journalism and I’m pleased to see an opinion piece of his is the FT’s editor’s pick today. Here’s the headline
Pension shift will change the UK financial landscape
Toby argues that there is a fundamental shift in the ownership of the assets of UK pensions from trustees to insurance companies and this is down to the acceleration of the DB end game.
But I sense his heart is not pounding at the prospect. I suspect he is not sure such a shift is “for the better”
Today, the interests of the 10.1mn members of private sector DB schemes are overseen by about 5,200 boards of trustees, their advisers and their managers. The LDI crisis made plain that investment strategies lacked the kind of heterogeneity in risk exposures that might be assumed to flow from such a large population of investors. But a future in which eight insurers dominate the market does not seem entirely unproblematic either.
And he points to the capacity crunch that is slowing the transfer of what seem well-funded schemes to their insured resting place. The LDI catastrophe has drained schemes looking to buy-out of their liquid assets and all too many are now clinging to their hedges to with what liquidity they can find to meet expanded collateral buffers. This leaves the growth portion of the assets largely in illiquids, assets that insurers don’t want. The choice is to liquidate and take a haircut or hang on and hope to get out close to the current valuation of your illiquids. (Toby uses a wonderful invention “marked-to-make believe” to describe some current valuations. Either way, “there is no easy way out“.
Likewise with data, there just aren’t the quality administrators to go round.
Double-checking that correct spousal details are coded in the right systems for tens or hundreds of thousands of scheme members is slow work, and there is simply insufficient capacity to complete the paperwork demanded by insurers.
Toby concludes that the “Pension Shift” is for the future, for now
the capacity to migrate to buy-out looks to be only £50bn a year which is little more than a rounding error in the context of a £2tn pensions market.
With a rather cavalier conclusion, Toby dismisses these illiquidity and poor data as real but temporary
The constraints are real. But they are not permanent. A world of change is coming to the UK’s financial landscape.
An alternative view
If I read Toby’s article correctly, I suspect that it is written in hope but not in expectation that the hegemony of a small group of insurers will be averted by the arrival of something else.
What “something else” might be is of course too speculative for an FT article but not too speculative for this blog, which likes to explore alternatives to current thinking. So here are three alternative scenarios
- The DWP and TPR abandon their current DB funding regs. and code which martials the 5200 schemes to the gates of the insurers. This would give opportunities for DB master trusts to consolidate small schemes with some certainty of earn out on assets over time.
- The DWP revisit the 2018 consultation on Superfunds (which they have yet to respond to) and enable commercial organizations to take on DB scheme assets and liabilities as going concerns – running off liabilities not through insured annuities but through the prudent management of the funds and the pensions.
- That CDC is given air to breathe and not asphyxiated by the CDC regulations and code. Any relaxation in the DB regs and code will not go so far as to release sponsors from the obligation to support trustee guarantees, but there is an opportunity to start again with a pension system based on best endeavors rather than insurance.
We have a pensions policy team at the DWP that has been tasked with reducing the gap between the DB and the DC promise. The Pension Shift, resulting from a return to more normal interest rates and a degree of inflation has given us options.
Now is an interesting time to explore these options, rather than shutting the door on the future. There are prizes to be won for schemes that dare; better deployment of assets that allow employers to demonstrate commitment to ESG; better benefits for staff prepared to accept their employer’s sponsorship of their pension benefits (rather than an insurer’s).
And there is a wider win here for society. We need diversification of investment to fund a confident growing economy. Locking down our DB assets in bulk annuities backed by debt is not a societal win. Finding ways to use our DB legacy to fund the growth needed to pay the next generation’s retirement bills, sounds a just transition from this “Pension Shift~”.